Air New Zealand has reported a Net profit after Tax of $94 million for the six months ending 31 December 2002.

Features of the result were:

Revenues of $1.84 billion, up 2 percent

Costs of $1.43 billion, down 8 percent

EBIT of $150 million, up $201 million

Cash Flow From Operations of $326 million up $514 million

Gearing drops to 69.6 percent

Consolidated Performance Review

Improved trading conditions resulted in the Group1 reporting a half year pre-tax profit of $138.3 million before Unusual Items. Profit after deducting taxation of $40.5 million and Unusuals Items of $3.8 million, is $93.9 million.

Group Earnings before Interest and Taxation were $149.9 million, up $200.7 million on the equivalent period in the 2002 financial year.

The Group generated a substantial improvement in Net Cash Flows from Operating activities of $326.1 million, up $513.5 million on the prior comparative period.

Operations

Overall capacity for the period, as measured by Available Seat Kilometres (ASKs), decreased by 2.4 percent to 14.9 billion ASKs when compared with the prior corresponding period. Traffic, as measured by Revenue Passenger Kilometres (RPKs), increased 7.3 percent to 11.4 billion RPKs when compared with the same period in the 2002 financial year. The resulting passenger load factor of 76.2 percent was up 6.9 percentage points on the prior period.

In the New Zealand domestic operation, capacity decreased by 5.4 percent to 1.8 billion ASKs when compared with the prior year. Capacity in the domestic market substantially increased in the prior period, following the collapse of the Qantas New Zealand operations. This capacity has been reduced slightly with renewed competitor activity in the review period. Domestic traffic increased period-on-period by 1.9 percent to 1.3 billion RPKs. This increase is largely due to the strong response in the domestic market to the more affordable fares introduced with the launch of Air New Zealand's Express Class during November 2002. Passenger load factor in the domestic business of 71.2 percent was 4.9 percentage points higher than the prior period.

International capacity was 13.2 billion ASKs for the review period, a decrease of 2.0 percent over the corresponding half-year period. International traffic increased 8.0 percent to 10.1 billion RPKs as the demand for leisure and business travel recovered from the rapid decline caused by the events of September 11. International passenger load factors increased from 69.7 percent to 76.8 percent as a result of the recovery in passenger numbers and decrease in capacity.

Profitability

Air New Zealand's overall gross passenger yield (as measured by gross passenger revenue divided by operating RPKs) fell from 13.5 cents to 12.5 cents per RPK, a decline of 7.4 percent. A combination of aggressive competitive activity and the lower domestic fares offered in the new Express Class resulted in domestic yield falling 4.2 percent to 29.3 cents per RPK. The strengthening of the New Zealand dollar had a negative impact on international yields which declined 7.4 percent to 10.4 cents per RPK.

Gross operating revenues from continuing businesses increased 2.0 percent to $1,843.3 million. Passenger revenue was down 0.6 percent to $1,423.2 million as yield declines offset increased passenger numbers. Cargo and Mail revenue increased by 3.6 percent to $160.0 million. Contract Services revenue increased slightly to $153.0 million, up 3.5 percent on the prior period. Contract Services revenue is predominately related to third party revenue earned by Air New Zealand Engineering Services (ANZES) and Air New Zealand Terminal Services.

Other Revenue increased 47.1 percent to $107.2 million. This increase is primarily attributable to war insurance levies collected by Air New Zealand. This was off-set by an increase in war risk insurance premiums included under Other Expenses.

Air New Zealand's Fuel and Oil costs, net of hedging, decreased $61.0 million to $264.2 million for the period. Of this approximately $44.2 million is attributable to favourable foreign exchange rates and a further $7.7 million due to reduced consumption. The impact of fuel price changes was minimal, as the increase in base fuel costs was offset by hedging gains. Additionally, due to changes in the charter arrangements of cargo freighters hired by Air New Zealand, related fuel costs have been accounted for under aircraft operations in this period ($10.8 million in the prior period).

Maintenance and Overhaul costs reduced by $40.6 million to $115.4 million. The decrease reflects a foreign exchange benefit of $13.0 million combined with a relatively low engine upgrade and airframe heavy maintenance requirement this period. Due to the cyclical nature of aircraft maintenance, costs generally fall unevenly across periods.

ANZES provides a full range of maintenance, repair and overhaul (MRO) services both to Air New Zealand and to external customers who make up close to half of ANZES' total revenue. ANZES is managed separately from Air New Zealand's airline operations and a relatively arm's length transfer pricing regime governs the work performed by ANZES on Air New Zealand aircraft. The financial performance of ANZES is disclosed in the Segmental Information note (note 2 to the Financial Statements on page 14) of this report.

ANZES' Earnings Before Interest and Taxation were $25.5 million ($21.7 million in the prior corresponding period) on revenues of $247.2 million ($283.8 million in prior corresponding period). ANZES' revenues vary according to the mix of engine and airframe maintenance work undertaken. Airframe maintenance is labour intensive, while engine maintenance revenues are predominantly related to the acquisition and resale of high value parts.

Consolidated Balance Sheet

Gearing (as measured by debt to debt plus equity) for the Air New Zealand Group at 31 December 2002 was 36.2 percent (47.0 percent as at 30 June 2002). If aircraft operating leases are included by capitalising the annual lease payment at the industry accepted factor of seven, the gearing increases to 69.6 percent. This is a 4.2 percentage point improvement on the comparable level at 30 June 2002. The improvement in gearing has been assisted by Air New Zealand's strong operating performance and the increase in the value of the New Zealand dollar from 49 cents as at 30 June 2002 to 52 cents. As aircraft lease and aircraft financing liabilities are denominated in United States dollars, the increased value of the New Zealand dollar has decreased the value of these liabilities on translation.

1. The "Group" throughout this report refers to all Air New Zealand consolidated businesses.

2. 2001 and 2002 fuel and yield numbers are for the continuing operations only.

NOTE: The content of all Air New Zealand media releases are accurate at the time of issue, as stated at the top of each release. For updates on any changes, please contact Air New Zealand.

Air New Zealand is proud to be a member of Star Alliance. The Star Alliance network was established in 1997 as the first truly global airline alliance to offer worldwide reach, recognition and seamless service to the international traveller. Its acceptance by the market has been recognised by numerous awards, including the Air Transport World Market Leadership Award, Best Airline Alliance by both Business Traveller Magazine and Skytrax. The member airlines are: Adria Airways, Air Canada, Air China, Air New Zealand, ANA, Asiana Airlines, Austrian, Blue1, bmi, Continental Airlines, Croatia Airlines, EGYPTAIR, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Shanghai Airlines, Singapore Airlines, South African Airways, Spanair, SWISS, TAP Portugal, Turkish Airlines, THAI, United and US Airways. Aegean Airlines, Air India, Brussels Airlines and TAM have been announced as future members. Overall, the Star Alliance network offers 19,500 daily flights to 1,071 airports in 171 countries.